Norwest’s Edtech Play: Aim Straight For Consumers Needing Skills

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Palo Alto, CA-based Norwest Venture Partners is one of the investment firms that are placing bets on educational technology, a fast-growing field that is transforming the way students learn, from kindergarten through college and beyond.

I talked recently with Sergio Monsalve, one of the Norwest partners who is shepherding the firm’s edtech investments. In the conversation below, Monsalve talks about his rationale for choosing edtech companies that serve consumers directly, rather than competing with universities to offer students accredited courses of study.

Norwest traces its history back to the 1960s, when it was one of the first firms making early investments in supercomputer companies such as Cray Research. Through the ensuing decades, Norwest has backed consumer products, cellular technologies, Web-based software, and wireless communications, with some forays into healthcare product development. In recent years, Norwest has diversified its portfolio and expanded its global reach, primarily in India, China, and Israel.

The firm has supported more than 550 companies in the past five decades. In May it raised a new $1.2 billion fund, bringing its total capital and commitments to about $5 billion. Also in May, it led a $32 million Series C round for edtech company Udemy, an online marketplace that hosts course offerings by independent educators who teach primarily through instructional videos.

In a recent blogpost, Norwest partners said the investor community is on pace to plough $2 billion into edtech companies this year, a substantial increase from spending in 2012 and 2013.

Monsalve, (pictured above) whose interests also include e-commerce, consumer finance, and consumer software as a service, is a board member at Udemy and at Rafter, another edtech company in Norwest’s portfolio. A transcript of our conversation, condensed and edited for clarity, follows.

Xconomy: Why are you personally interested in investing in educational technology?

Sergio Monsalve: We all tend to have very specific areas of focus where we’ve been entrepreneurs ourselves. My background is in consumer technology and online marketplaces. I’m interested in educational technology mainly from a consumer standpoint, not from the point of view of integrating with institutions, such as universities.

Some of our investments are gaining traction, such as Udemy, which is part of the edtech sector aimed at lifelong learning and closing the skills gap among working populations. Education today doesn’t really fulfill a lot of today’s job needs.

Udemy is one of our fastest growing companies. It hosts tens of thousands of long-form instructional videos that cost about $20 to a couple of hundred dollars. We also invested in San Mateo, CA-based Rafter, which is lowering the cost of education by lowering the cost of educational materials to students.

Xconomy: How do you see the global edtech market shaping up?

Sergio Monsalve: This is a huge industry with a lot of sub-segments; a lot of disruptive potential as well as land mines to avoid. There are two ways to approach it. You can create accredited degrees online like Minerva, or partner with universities, as Coursera does. Some of these companies are creating courses online that could supplant higher education institutions already out there. That takes a lot of time, a lot of capital. The problem is that it’s hard to compete against a brand like Stanford or Harvard that has been built over many years. You have to be patient, and you have to build a brand as a next-generation educational institution.

Another way is through the consumer directly. With K-12 education, post-secondary education, and lifelong learning, there are incredible amounts of spending power that could be tapped from students, parents, and workers—for somebody who needs to get new skills. This model appears a lot more like a consumer interest business than traditional educational institutions as we know them today.

The great advantage about this type of model is that you don’t need an institution. You don’t come out with a diploma after you go through a Udemy course. We think the world is moving away from a piece of paper (a credential) to practical, actual skills you can use.

Xconomy: What is the basic problem that such edtech companies can solve?

Sergio Monsalve: Look at all the jobs that we need to fill in Silicon Valley, and all the people graduating from college who don’t have the necessary skills. Technology is moving so quickly that education is not able to keep up.

If somebody graduates from a top-ten college with a marketing degree, for most of them, there’s no such thing as taking a Facebook marketing class or a Google search marketing class. These are probably the most important skills for them to have. There’s no mobile marketing class on how to get consumers to download your app. Right now, it’s not embedded in the college curriculum.

If a new marketing graduate, 22 years old, gets hired, right off the bat they need to learn business tools for Facebook, Google and Twitter. The only option to learn it quickly is to tap practitioners who are teaching it online. That enrichment of the educational market is what I’m really excited about.

I’ve seen figures that 30 percent of students in the United States fail out of high school. Even in the best of school districts, there’s a huge success gap. While there are quality teachers out there, there are a number of systematic obstacles that perpetuate the problems of the educational system. This is where technology comes in—you’re able to scale the good teachers, so they’re reaching 500 students rather than 10 or 20 students. An example of this is when homework is done online, it can be graded and analyzed using algorithms, rather than having teachers spend all their nights and weekends grading.

Xconomy: What is the enduring value of a traditional college education?

Sergio Monsalve: The college experience has become more of a sorting machine for you to build your own network and your own friendships. You learn from other students, learn from your peers. There’s real value in applying and going to these schools and spending time with motivated kids.

To think online education is going to replace all that is unrealistic. But you can scale that experience.

Xconomy: What are Norwest’s plans going forward in the edtech space?

Sergio Monsalve: We expect to do more investments in education. We’re actively looking. It’s such a big industry, and the problem is so complicated that we see a lot of opportunity in the space. If you think in that context, there could be four, five, six different Apples and Googles arising in the edtech sector in the next 20 to 30 years. It’s safe to say we’re going to be constantly looking at this market.

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy